Israel's Institutionals Should Invest Much More Assets Overseas, Says Watchdog

Their excessive exposure to the domestic market risks our pension savings, Yadin Antebi warns

Israel's institutional investors are stepping up their investments outside Israel and, it turns out, they not only have the blessing of the watchdogs: they should step up the pace, advises capital markets commissioner Yadin Antebi.

Antebi believes more Israeli money should be invested overseas. Much more.

He is concerned mainly about the low exposure of institutionals managing pension funds to foreign investments. That definition includes proper pension funds, insurance companies, and training funds. Their top-heavy focus on the domestic marketplace imperils the public's pension savings, Antebi warns.

"There has been some improvement, but it is slow and does not provide a solution to the problem of almost total exposure to domestic market risks," he said, speaking at a conference in Tel Aviv last week.

"The diversification of the bodies managing our pension savings is not reasonable," Antebi told the audience. "In markets far more developed than ours, which are not geographically isolated as we are and which have no special political or diplomatic problems as we do, some 25% of pension savings are invested in other countries.

"Over here, only 7% of our pension savings are invested abroad, and that's without factoring in the 'veteran' pension funds that had been prohibited  from investing overseas."

But since those times, the regulators have removed the barriers restricting the outflux of foreign currency. The Finance Ministry lowered the tax on capital gains made overseas, equalizing it with the tax on domestic capital gains. Quotas on foreign investment were abolished, yet, Antebi railed, "Israel's institutionals continue to cling to the domestic marketplace."

Meanwhile, foreign money has been coming here, just exacerbating the situation. Israel's pension savings have become volatile based on the situation in the local market, he explained.

European countries invest 26.5% of their pension savings in other markets, Antebi told the crowd. In Japan and Australia the rate is about 18%. Even the U.S., which is enormously bigger and more diversified than Israel, places 11% of its pension savings in other venues.

He presented a chart of the TA-25 index against the returns of provident funds, his point being absolute correlation between the two. When the Tel Aviv Stock Exchange slides, so do provident fund returns, and vice versa.

In 1983 Israeli stocks lost 80% of their value because of the bank-stocks manipulation scandal, Antebi pointed out. Then in 1994 there was the stampede to withdraw money from provident funds, which sent stocks tumbling by 37%. Come 2002, stocks sank 31% as terrorism and the recession struck in tandem.

The commissioner then presented a table showing investments abroad by Israel's institutional investors. The provident funds invest just 6.5% of their NIS 32 billion assets outside the country, while the new pension funds invest even less: 2.9% out of their NIS 30 billion.

As for the insurance companies, their combined equity is NIS 13 billion and they place all of 5.4% of their assets in foreign instruments. The insurance companies' intense focus on the local market has cost them heavy losses, Antebi said.

One exception is profit-sharing insurance policies, which were released from restrictions in 2002 and have placed 12.7% of their NIS 70 billion assets abroad, he said. Mutual funds are also well ahead of the pack with 12.9% of their NIS 125 billion outside the country.